Exploring Circular Ownership in Compliance Investigations

Beneficial ownership continues to be a frequently discussed topic in the compliance space. The dialogue includes the importance of determining and maintaining a public database of beneficial ownership structures, the challenges of doing so, and, in some instances, the secrecy and complexity surrounding ownership structures and using threshold ownership percentages to define compliance. Understanding an entity’s beneficial ownership structure is a requirement under various anti-bribery and anti-corruption, anti-money laundering, and sanctions laws and regulations. The reason for the required transparency is to enable a company or financial institution to determine whether its third parties (such as a customer, counterparty, vendor, or supplier) are owned by government officials, are subject to sanctions, or require enhanced due diligence based on percentage of ownership thresholds.

In this post, one such approach to beneficial ownership structures will be examined: circular ownership. As discussed below, circular ownership structures are legal in some jurisdictions, yet illegal in others. Circular ownership structures may take several different forms and may occur in a closed or open circular setup. These structures could be simple or complex, and not necessarily easy to recognize. Most importantly, circular ownership structures can be used to mask the true ownership structure or control of an entity.  The result is the appearance of ownership or control levels being at a lower percentage threshold that may not trigger due diligence or sanctions requirements (such as 5%, 25%, or 50%).  However, in reality, the circular structure creates a compounding of the actual ownership share resulting in a greater percentage of control of an entity than what is apparent.

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